• James Odene

What is behavioural economics?

“Wouldn't economics make a lot more sense if it were based on how people actually behave, instead of how they should behave?” Dan Ariely: Predictably Irrational: The Hidden Forces That Shape Our Decisions

Behavioural economics (BE) studies the effects of psychological, emotional, cultural and social factors on an individuals ability to make decisions. It is a scientific, evidence-based science that sits between marketing, economics and human psychology to understand why people make consumer choices.

It offers behavioural insight as a marketing and communication advantage to optimise messaging for the greatest chances of behavioural change.

“Human Nature is not a problem that can be fixed by rules and regulations. All solutions to the existing problems must be based on how people behave, not on how we think they should behave.” Kirk Chisholm

What behavioural economics isn’t...

There is a classical economic model of human behaviour that describes us as rational, logical and formulaic beings whose behaviour can quite readily fit in to simple models and be explained away. This supposes that we are all largely the same and will act in predictably rational ways from a position of perfect choice and perfect knowledge.

From this we hold some surface and largely incorrect assumptions:

  • That decision making is logical, rational, and a conscious act

  • We all have ‘self-insight’ whereby we can explain how we make decisions rationally

  • Decision making is a sequential process

  • We never have any level of cognitive dissonance

These assumptions are comfortably and widely held as they reflect us to be rational, understandable and logical beings. The sense of control and steadfastness is a core requirement for people to feel safe and the thought that we are not rational, logical beings challenges this.

We would rather hold soothing incorrect assumptions than challenging truthful ones and our brains are remarkably adept at perpetuating that illusion.

Ever seen 'which is darker?' illusions like this one...

Source: wikipedia

So which is darker? A or B?

So your brain is pretty sure that A is darker, right?

I mean, it wouldn't be an illusion if that was true... Actually they are the same colour and here is the proof.

Source: wikipedia

And for those who still don't believe me, put your finger up to the screen and block out the middle squares... and now look around and smile to anyone wondering what on earth you are doing.

Now, the quirk here is that, even though you know that they are the same colour. You could spend hours looking at the illusion and still see that A as darker than B, even though you know you're wrong.

“… your unscrupulous brain is entirely undeserving of your confidence. It has some shifty habits that leave the truth distorted and disguised. Your brain is vainglorious. It’s emotional and immoral. It deludes you. It is pigheaded, secretive and weak-willed.”
Cordelia Fine: A Mind of Its Own

Gosh, thanks Cordelia... harsh.

Heuristics, pesky things

What is happening here is known as a heuristic. A mental short-cut your brain makes when making a decision. Because it is cutting corners all the time to reserve energy, the decisions we make are largely obscured from logic. And the pesky quirk of it is, we don't even know that it happens. We can be down-right-sure that we have made a decision based on sound logic, but the truth is not a always the case!

The truth is that we have, what Nobel Prize winning economist and psychologist Herbert Simon calls ‘bounded rationality’. He suggests that our decision-making process is really bound by three factors:

  1. The complexity of the problem

  2. Limitations of the mind making decision

  3. The time available

So, what does this all mean?

Considering our bounded rationality and accepting that our decision-making processes are not necessarily logical, rational or even conscious – BE has some surprising, fun and down-right quirky insights (known as biases or heuristics) into what may impact and influence the way in which we make decisions.

BE can help improve the chances that people will act in a way that you are striving for, be that to reduce their meat consumption, sign a petition, take a diet change challenge or support a campaign.

Behavioural economics your scientific friend that may just boost your impact, and you know the best part is - often the changes you can make are so small and therefore cheap. Win win!

#behaviouraleconomics #BE #behaviour #BoundedRationality

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